Let’s start by seeing how the Bank of England creates the electronic money that banks use to make payments to other banks. Central bank reserves are one of the three types of money, and are created by the central bank in order to facilitate payments between commercial banks.
In the following example we will show how the central bank creates central bank reserves for use by a commercial bank, in this case RBS. Initially the bank of England’s balance sheet appears as so (this is a simplified example where we’ve ignored everything except this particular transaction):
